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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Blog

Jul 11

Written by: Donald van Deventer
7/11/2011 3:19 AM 

Today’s blog focuses on the U.S. dollar funding shortfall that took place at Wachovia Bank NA during the period from February 8, 2008 to March 16, 2009, through the merger battle by potential acquirers Citigroup and Wells Fargo and post the December 31, 2008 closing of the merger with Wells Fargo. Today’s blog shows that the funding squeeze at Wachovia was acute and quickly peaked at $36 billion in borrowings from the Fed.  As we have seen often in this series of blogs, Wachovia was granted more money from the Fed than Lehman Brothers was refused until after its bankruptcy was announced September 14, 2008.

This is the fourteenth Kamakura case study in liquidity risk, following earlier blogs on AIG, Bank of America, Countrywide Financial, Merrill Lynch, a consolidation of the latter three firms, Lehman Brothers, Morgan Stanley, Citigroup, Dexia SA, Depfa Bank plc, Barclays, Goldman Sachs, and the combined JPMorgan Chase, Washington Mutual, and Bear Stearns.

Under the Dodd-Frank Act of 2010, the Board of Governors of the Federal Reserve was required to disclose the identities and relevant amounts for borrowers under various credit facilities during the 2007-2010 financial crisis.  These credit facilities provide perhaps the best source of data about liquidity risk and funding shortfalls of the last century.  This data is available for purchase from Kamakura Corporation and is taken from the Kamakura Risk Information Services Credit Crisis Liquidity Risk data base. We use this data to determine to what extent there was a funding shortfall at Wachovia during the credit crisis.

The data used for Wachovia Bank NA in this analysis are described in more detail below. The data consist of every transaction reported by the Federal Reserve as constituting a “primary, secondary, or other extension of credit” by the Fed. Included in this definition are normal borrowings from the Fed, the primary dealer credit facility, and the asset backed commercial paper program. Capital injections under the Troubled Asset Relief Program and purchases of commercial paper under the Commercial Paper Funding Facility are not included in this definition put forth by the Federal Reserve. 

A detailed chronology of the 2007-2009 credit crisis is given in these two recent blog posts:

van Deventer, Donald R. “A Credit Crisis Chronology Part 1 Through February 2008: This Time Isn’t Different,” Kamakura blog,, May 13, 2011.

van Deventer, Donald R. “A Credit Crisis Chronology Part 2 March 2008 Through March 2009: This Time Isn’t Different,” Kamakura blog,, May 14, 2011.

The key dates in the chronology relevant to Wachovia are summarized below. The Levin report referred to below is the report entitled “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” Majority and Minority Staff Report, Permanent Committee on Investigations (Senator Carl Levin, Chairman), U.S. Senate, April 13, 2011. The SIGTARP report means the document entitled “Emergency Capital Injections Provided to Support the Viability of Bank of America, Other Major Banks, and the U.S. Financial System,” Office of the Special Inspector General for the Troubled Asset Relief Program, October 5, 2009.

May 7, 2006
Wachovia announces acquisition of Golden West Financial Corporation, a major California mortgage lender, for $25.5 billion (Source:

November 9, 2007
US's fourth largest lender Wachovia revealed a $1.1 billion loss due to a decline in value of its mortgage debt

June 2, 2008
Wachovia CEO Thompson is ousted following large losses that resulted from the acquisition of Golden West at the peak of the housing market (Source: Reuters).

July 22, 2008
Marking the largest loss in the history of the fourth largest U.S. bank, Wachovia loses $8.9 billion in the second quarter (Source: Financial Times).

September 29, 2008
Citigroup announces its intention to buy Wachovia Bank, which later falls through (Source: SIGTARP report, page 8).

October 3, 2008
Wells Fargo announces its plan to buy Wachovia Corporation, the parent of Wachovia Bank NA (Source: SIGTARP report, page 11).

October 4, 2008
Wells Fargo offers $15.1 billion to buy Wachovia, outbidding Citigroup’s $2.2 billion bid (Source: Financial Times).

October 12, 2008
Wachovia sold to Wells Fargo (Source: Levin report, page 47).

October 22, 2008
Wachovia loses $24 billion as customers drain a quarter of their deposits (Source: Bloomberg).

December 31, 2008
Wells Fargo acquisition of Wachovia closes (Source: SIGTARP report, page 20).

This blog reports on “primary, secondary, or other extensions of credit” by the Federal Reserve to Wachovia during the period February 8, 2008 to March 16, 2009. In the past, we have reviewed both firms that were involved in a merger situation. The Federal Reserve did not report any borrowings by Wells Fargo in its Dodd Frank disclosures, so no borrowings for Wells Fargo are reported here. Wachovia Bank NA’s borrowings from the Federal Reserve can be summarized as follows:

Borrowing dates:
First borrowing April 16, 2008 for $1,225,000,000, with intermittent borrowings thereafter, followed by a $29 billion borrowing on October 6, 2008. Borrowings were continually outstanding thereafter until the first business day after the Wells Fargo acquisition of Wachovia, January 2, 2009.
Average from

2/8/2008 to 3/16/2009
$5.96 billion
Average when Drawn
$23.8 billion
Maximum Drawn
$36.0 billion on October 8, 2008
Number of Days with

Outstanding Borrowings
101 days

What is unique about the Wachovia borrowing on October 6, 2008 is that $23 billion was borrowed to mature at an odd maturity, January 2, 2009.  Clearly Wachovia management understood that Wachovia’s liquidity problems were likely to be serious for some time and that borrowing past the usually choppy funding markets around year end was important. The graph below shows the one month and one year default probabilities for the parent of Wachovia Bank NA from Kamakura Risk Information Services version 5.0 Jarrow-Chava reduced form credit model. Default probabilities began rising steadily through the close of business on September 26, 2008, the last data point provided by Kamakura Risk Information System due to the announcement of a (later terminated) government assisted takeover offer by Citigroup:

Cumulative default risk is shown below for Wachovia on September 26, 2008, immediately before the announcement of the proposed combination with Citigroup. Wachovia’s 5 year cumulative default risk was 40.99%, about triple the peak level reached by Barclays (13.89%) in March 2009.

The graph below shows relatively modest borrowings by Wachovia in the wake of the Bear Stearns rescue announced on March 17, 2008. Major borrowings started on October 6, 2008 with a total draw down of $29 billion. Wachovia remained a major borrower until the close of the acquisition by Wells Fargo became effective with the opening of business on January 2, 2009. Wachovia’s rescue was announced before capital injections were made under the Troubled Asset Relief Program.  Wells Fargo, however, was granted a capital injection of $25 billion in late October 2008 in anticipation of closing of the merger with Wachovia on December 31, 2008.

In the chart below, we compare Wachovia’s consolidated funding short fall to those firms whose liquidity risk we have previously analyzed in this series.  Wachovia’s consolidated funding shortfall, measured by average drawn borrowing of $23.8 billion, ranks third of the firms analyzed in this series to date.

If one ranks the same firms by largest outstanding borrowing on a single day, Wachovia ranks ninth, with a peak borrowing of $36.0 billion, $8 billion more than the $28 billion post-bankruptcy borrowing of Lehman Brothers:

Borrowings During the Bear Stearns Crisis, March 14, 2008 to May 31, 2008

If we focus on the period from March 15 (one day prior to the JPMorgan Chase absorption of Bear Stearns) to May 31, 2008, Wachovia ranks 17th in average borrowings, slightly higher than 18th-ranked Lehman Brothers.

If one analyzes the maximum borrowings during the Bear Stearns crisis, March 15-May 31, 2008, Wachovia ranks 16th:

Borrowings from the Commercial Paper Funding Facility

There were no borrowings from the Federal Reserve’s commercial paper funding facility by either Wells Fargo or Wachovia Bank NA’s parent, Wachovia Corporation.

Implications of Funding Shortfall Data

In what is becoming a familiar theme in this series, Wachovia borrowed $8 billion more, a total of $36 billion, than the $28 billion which was refused to Lehman Brothers until that firm declared bankruptcy.  Clearly, the highly publicized run on deposits at Wachovia was a factor in the post-Lehman thinking about “too big to fail.”

Background on the Federal Reserve Data

A summary of the Federal Reserve programs that were put into place and summary statistics are available from the Federal Reserve at this web page:

Today’s blog focuses on one set of disclosures by the Federal Reserve: primary, secondary and other extensions of credit by the Fed.  This includes direct, traditional borrowings from the Federal Reserve, the primary dealer credit facilities, and the asset backed commercial paper program described at the link above.  These borrowings do not include commercial paper purchased under the Commercial Paper Funding Facility nor do they include the equity stakes taken by the U.S. government under the Troubled Asset Relief Program.

Kamakura took the following steps to consolidate the primary, secondary and other extensions of credit:

  • From Kamakura downloaded the daily reports, in PDF format, from the Federal Reserve on primary, secondary and other extensions of credit from February 8, 2008 until March 16, 2009, approximately 250 reports in total
  • Kamakura converted each report to spreadsheet form
  • These spreadsheets were aggregated into a single data base giving the origination date of the borrowing, the name of the borrower, the Federal Reserve District of the borrower, the nature of the borrowing (ABCP, PDCF, or normal), the maturity date of the borrowing, and (in the case of Primary Dealer Credit Facility) the name of the institution holding the collateral.
  • Consistency in naming conventions was imposed, i.e. while the Fed listed two firms as “Morgan Stanley” and “M S Co” Kamakura recognized to the maximum extent possible that they are the same institution and used a consistent name
  • To the maximum extent possible, the name of the ultimate parent was used in order to best understand the consolidated extension of credit by the Fed to that firm.

For information regarding the Kamakura Credit Crisis Liquidity Risk data base, please contact us at  Please use the same e-mail address to contact the risk management experts at Kamakura regarding how to simulate realistic liquidity risk events in the Kamakura Risk Manager enterprise-wide risk management system.

Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
July 12, 2011

© Copyright 2011 by Donald R. van Deventer, All Rights Reserved.